Fatwa: Are Premium Bonds Halal or Haram?

This is iA the most comprehensive resource for this question on the internet.

We present views from IslamQA.org, askimam and Al Qalam, then our resident expert Mufti Faraz Adam presents his views, and finally IFG present a commercial perspective on the matter.

View One: Islamqa.org

Contrary to shares , premium bonds do not represent the ownership of the holder in a company or a financial institution, rather it only signifies giving a loan to the issuers of these bonds.

Due to this fact, the excess amount received on these bonds, which is stipulated and sought from the contract, is regarded as usury ( riba ), and is thus unlawful ( haram ).

Contemporary scholars have declared all transactions with regards to prevalent types of bonds unlawful, as it involves interest ( riba ). (See: The resolutions of the Islamic Fiqh Academy ).

And Allah knows best

Muhammad ibn Adam al-Kawthari, UK

[ U.K. savings bond with cash prizes: in the United Kingdom, a savings bond issued by the Treasury and purchased by the public, on which no interest is paid. Instead, there are monthly draws for cash prizes. Encarta ]

[BOND: Finance certificate promising repayment of debt: a certificate issued by the government or a company promising to pay back borrowed money at a fixed rate of interest on a specified date – ibid .]

Source: here. See also here.

View Two: Askimam

At the outset, it should be noted that it is impermissible to invest in in’ami bonds.

Below is a recent fatwa issued by us to a similar query regarding In’ami bonds.

You have likened the In’aami bond of Pakistan to the Premium bond of England. As far as the In’aami bond, also known as Prize bond is concerned, it consists of two elements that render it impermissible, namely gambling and interest. If they are interest free, they are still impermissible for the following two reasons:

  1. It involves gambling, which Islam forbids. The bond monies are either invested or given on interest bearing loans. The profits accrued there from are collected in a draw. Whoever’s bond number appears in the draw becomes entitled to the money. This is a gamble and is impermissible.
  2. In’aami bonds could be classified as a partnership, as bond monies are jointly collected and invested, which makes all those that purchased bonds partners in the item invested. The principle in partnership is that all partners share in the profit of the investment in proportion to their contribution. In In’aami bonds, though they are partners, they do not share in the profit accrued from the investment, rather the monies are put in a draw and the one whose bond number appears in the draw becomes entitled to the money whilst the others are deprived of their monies. This is against the principle of a partnership and thus impermissible. (Refer to Aap Ke Masaail, vol 6, pg 272, Maktaba Bayyinaat)

The late Grand Mufti of Pakistan, Mufti Rashid Ludhyani (Rahimahullah) had ruled In’aami bonds as Haraam and impermissible. (Ahsan Al- Fatawaa, vol 7, pg 26, HM Sa’eed)

We are unaware of the operational system of Premium bonds in England and thus unable to issue a ruling. We would appreciate if the contract of the premium bond scheme in England be forwarded to us for our review.

Source: here

View Three: Al Qalam

Premium Bonds are not suitable for Muslims to use as an investment tool as they are essentially a usurious loan. The premium holder effectively advances a loan to the bond issuer and is thereby entered into a prize-draw with the possibility of being awarded a prize of variable value. Even though Premium Bonds are redeemable only at par and do not attract a fixed rate of return, the condition of the prize-draw renders the structure a usurious transaction as any conditional increase above the principal is usury.

The National Savings and Investments (NS&I) website [1] describes premium bonds as follows:

Premium Bonds are an investment where, instead of interest payments, investors have the chance to win tax-free prizes. When someone invests in Premium Bonds they are allocated a series of numbers, one for each £1 invested. The minimum purchase is £100 (or £50 when you buy by monthly standing order), which provides 100 Bond numbers and, therefore, 100 chances of winning a prize. You can hold up to £30,000.

With 23 million bondholders holding £26 billion worth of Premium Bonds nationwide, Premium Bonds are one of Britain’s financial success stories. They are a fun, yet serious way of saving, combining the chance of winning tax-free prizes with the peace of mind that comes from knowing your capital is 100% secure.

Whilst an increase in the form of a prize of variable value is not assured for each bond holder on an individual basis and thus an increase above the principal is not made conditional individually, collectively, the bond holders are assured entry in to the prize draw with the prizes to be distributed on the basis of drawing lots. Thus, an increase above the principal is made conditional collectively subject to the results of the draw. The issuer is contractually bound to hold a periodic draw according to the terms stipulated and faces legal redress in the event it fails to do so. Each bond holder has a legal right to be entered in to the prize draw according to the terms stipulated making the loan advanced conditional.

The ruling related to premium bonds should not be confused with that related to promotional prizes in the purchase of electrical and other consumer products or with that related to an unconditional gracious increase in the return of a loan – husn al-qadhâ. In the former, the purchase price is not a loan but is consideration for the commodity sold. The promotional prize is a unilateral gracious offering – tabarru’ from the vendor as an incentive to purchase the commodity. In the latter, although the return is an increase upon the principal, if it is not made conditional, neither explicitly by stipulation nor implicitly by being the norm, but is rather a matter of individual discretion, it is not only permitted to give an increase upon the principal but also praiseworthy to do so.

[1] http://www.nsandi.com/products/pb/howitworks.jsp#what_are_premium_bonds

Source: here

Mufti Faraz view:

Premium bonds are not Shariah compliant.

The Fiqh of the answer:

NS&I Premium Bonds are a savings account you can put money into (and take out when you want). You buy £1 bonds and each bond has an equal chance of winning, so the more you buy, the more your chances improve. For the chance to win a prize - all of which are tax-free and worth £25 to £1m - you forfeit an interest rate.

Since the funds in the savings account are technically loans from a Shariah perspective, it will not be permissible to receive any conditional or stipulated benefit in return of the deposit. Conditional benefits in lieu of a loan are also a form or Riba.

The IFG view:

Premium bonds are unambiguously not permissible and consequently all of the above fatawa are in agreement.

If you would like to invest in something halal then we recommend you check out our investment comparison page where you can compare all sorts of investments and choose one that’s best for you.

In particular, sukuk are the Islamic version of bonds, which may be of interest. Furthermore, property investment such as Yielders offer a regular rental return as well.

If you would like to learn more about each investment and how to structure your investment strategy - check out our Halal Investing Course here.